New York has been requiring Total Resource Cost test for every individual measure being installed as part of an eligible project. This means that the total cost (consumer and public sector) for every single energy conservation measure implemented must be cheaper than the next least cost option to qualify for rate payer funds.

This application of TRC at the measure level has been a disaster for contractors, program goals, and ultimately homeowners who often could not qualify for incentives on projects that objectively make sense to the customer, drive deep savings, comfort and many other benefits, with the vast majority of the investment is in the form of private dollars - yet they don't qualify for New Yorks program based on the antiquated and misapplied PSC mandated use of TRC.

It would appear that in this ruling the PSC has wisely attempted to change the rules to require TRC only at a portfolio level, allowing individual measures to pass based on a combination of much more straight forward tests including Program Administrator Cost Test (PACT) and Participant Cost Test (PCT). These tests looks primarily at public incentives versus savings and not full project costs that are likely driving a range of non energy benefits not counted in the TRC equation.

It remains to be seen how this approach will work in the real world, the the PSC applying a different bar at a measure level and at the portfolio, but it does seem to be a step at least in the right direction, and the NY PSC may have cleared some real hurdles that have cut into energy savings and hurting New York business.Here are the key elements proposed by the NY PSC staff to fix Cost Effectiveness Testing in their ruling:

Staff proposes a complete overhaul of how measures and programs are screened for cost-effectiveness. Staff's proposal would continue the use of the total resource cost (TRC) test but at the sector level for each utility rather than at the measure level. Staff proposes using the TRC, program administrator cost test (PACT) and participant cost test (PCT) at the program level to supplement program assessments. Staff further proposes expanding the TRC and PACT benefits to include environmental damage assessment costs for SOx and NOx, a revised CO2 cost, and updating to include LRACS, discount rates, etc. appropriate for the E2 program cycle. Staff proposes the development of a Cost-Effectiveness Test Reference Guide, to be updated regularly, that documents the information sources, methodologies, and assumptions associated with estimating the benefits and costs of each test.

Staff proposes the development of a standardized cost-effectiveness calculation tool to provide transparency and ensure the ability to provide consistent results. Specifically, Staff proposes that all sectors, with the exception of the low-income sector and “specific targeted programs” included in the Statewide Program Plan should be demonstrated to pass the TRC on a theoretical basis. A TRC of less than one will be allowed for the excepted class of programs – the exact value will be determined as the various TRC input parameters are finalized. For assessment purposes, program level test results for the TRC, PACT and PCT should be filed as a supplemental report to the initial Statewide Program Plan implementation. Staff proposes that during the five-year implementation cycle, the program administrators, coordinated by NYSERDA, annually submit retrospective program and sector-based TRC, PACT and PCT analyses based on program performance to-date.

Program Administrators would analyze sectors that are not cost-effective using program level analyses to identify the program(s) that are causing the sector to be non-cost-effective. Program administrators would propose a corrective action plan to improve cost-effectiveness and if a second annual retrospective cost-effectiveness analysis of cumulative program performance to-date shows that the sector does not pass the TRC, any program that caused the sector to be not cost-effective for two consecutive years would be discontinued. Staff suggests that a qualified consultant be obtained to support the development of the Cost-Effectiveness Test Reference Guide and the selection and development of the standardized cost-effectiveness calculation tool.

In terms of the complexities of NYSERDA and Utility programs (and the regulators that direct them) overlapping or completing while confusing the market, the PSC has laid out a series of goals and a basic structure to move forward towards more collaboration and organizational swimlanes. How these ideas actually play out will be interesting to watch as the ruling is not heavy on details.

The Commission and other policy makers can no longer afford to think of energy efficiency and distributed clean energy resources as peripheral elements of the electric system that require continuous government support. Rather, the time has come to manage the capabilities of these customer based technologies as a core source of value to electric customers. In addition, full integration of load management capabilities into energy supply and grid management decisions will improve system wide reliability, efficiency, and resiliency at just and reasonable rates for New Yorkers. The Commission is obligated to ensure that the clean energy programs, the roles and responsibilities of the regulated utilities and the retail markets are aligned to achieve robust market driven investment that supports the deployment and use of economic energy efficiency and clean technologies as critical components of New York‟s 21st Century power system design and operation.

NYSERDA’s statewide role would include the oversight and coordination of a customer-centric model for program delivery. A key component of the model would include common statewide application forms and a fulfillment portal. Marketing messages would also be controlled through a coordinated outreach strategy. NYSERDA would continue to deliver programs and NYSERDA's efforts in each utility service territory would contribute to the utility service territory's energy efficiency achievements.

Staff would have the investor owned utilities continue their role in designing and delivering programs. However, the utilities would collaborate with NYSERDA in an effort to exploit the strengths of the different organizations, rather than highlighting each others weaknesses in the competition for energy savings.

Just about everyone I know operating in New York would agree that more coordination and cooperation between the Utilities, NYSERDA, and the Public Service Commission would be a good thing, and simplification and alignment of the various programs out there into a coherent approach to the market would be a great start.

However it would be wise to analyze in this equation the balance of not just the role of Utilities vs. NYSERDA, but also to take into account the fundamental roles of the public vs. private sector.

We have a common situation in NY where the program proposes "market transformation" but the core of the market for energy efficiency is missing. A market at its core is centered on a transaction and a price. However, the result we are trying to encourage - energy efficiency, is not being tracked or rewarded in either a timely or transparent fashion.

Rather than put in place the foundation for a market based on paying for the product that is being brought to market - savings that can be calculated based on utility bills - we have instead attempted to regulate our way to a market by essentially determining the business model for energy efficiency through regulatory and stakeholder processes. Getting this complex equation right, in advance, without feedback or selection is nearly impossible (like writing a business plan, and then operating per the plan without checking the balance sheet).

Rather the just move the deck chairs around one more time, we should look closely at the overall approach to market transformation in energy efficiency. The definition of a Market is the process by which the prices of goods and services are established. If we want to establish the market for energy efficiency, we need to start by measuring it and setting a price for savings.

The contractors I know in the NYSERDA program would prefer to see NYSERDA focus on aligning incentives with actual energy savings and move away from the current extensive regulation of the contractor business model that has defined the current program. Rather then pour money into program overhead such as layers of approvals, requirements, and software, instead if we applies only a small fraction of those dollars to make delivering real energy savings lucrative, we could unleash the power of the market to innovate and select for those approaches that deliver results. We need to send a signal back to the market, and allow those business models that work to win, and those that do not deliver results to change or exit the market.

Rather than Utilities and NYSERDA focusing on redesigning the program and executing on traditional private sector activities like consumer marketing and lead generation, the utility sector should focus on procuring energy efficiency exactly like they already do for other energy commodities. If performance risk flows to industry, and ratepayers and regulators are buying delivered savings, regulators can be freed from attempting to manage the entire process in a vain hope to regulate good outcomes and instead focus on rewarding results.

Reward energy savings performance at the meter and the market will select for business models that customers demand and that are profitable for industry based on the value of the real savings delivered.

The good news is that given the amount of money being spent on programs in this sector, we could make delivering real savings a great business model while at the same time reducing costs by decreasing program overhead.

I hope that New York can seize this opportunity to put in place the foundation for a real market where Energy Efficiency can be valued and traded as a true demand side resource, letting markets emerge and allowing programs to play the contained regulatory role that they do in others successful markets.

Based on this ruling, I think there is room for NYSERDA and the Utilities to make the fundamental changes necessary, but it will take leadership and courage to turn this ship. However, overcoming big challenges with big ideas is the only real chance we have of success.

Proceeding on Motion of the Commission Regarding and Energy Efficiency Portfolio Standard